CFPB hits Fifth Third with Enforcement Order for Auto-lending
Discrimination
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Posted: 02 Oct 2015 01:30 AM PDT
Hi all - My name is Michael Emancipator. I am the new Senior
Regulatory Affairs Counsel, and I am thrilled to be a part of the NAFCU team!
On occasion, I will write for this blog to help credit unions interpret
regulations and compliance issues that come out of DC. Though I already met
some of you at NAFCU’s Congressional Caucus, I look forward to hearing from
each of you on these issues. I know many are working on last minute
preparations relating to tomorrow's TILA/RESPA Integrated Disclosures
deadline, but I thought you may want to take a break and look at the CFPB's
continued focus on indirect lending.
On September 28, the CFPB and Department of Justice announced an
auto-lending enforcement action against Fifth Third, charging $18M in
restitution to affected consumers. The action also required Fifth Third to
change their pricing and compensation system for its indirect auto-lending
program. The joint action alleged that Fifth Third’s program did not contain
enough safe-guards to prevent auto dealers from illegally charging a higher
rate to minority borrowers.
In an indirect auto-lending program, the auto dealer sends a
loan application for a car to the bank or credit union, which underwrites the
application and sets a loan rate based on the creditworthiness of the
applicant. The problem comes during the next step. After the dealer receives
the buy rate, some indirect programs give the auto dealer the discretion to
increase the rate when they finalize the deal with the customer, regardless
of the borrower’s creditworthiness - this is called the “dealer markup.”
With the enforcement action, the CFPB argued that Fifth Third’s
indirect auto-lending program allowed auto dealers to establish a pattern and
practice of discrimination by charging African-American and Hispanic
borrowers higher dealer markups than for non-Hispanic white borrowers - a
violation of the Equal Credit Opportunity Act.
The CFPB’s evidence of a pattern and practice of discriminating
against minorities was not direct. When Fifth Third provided its auto loan
information to the CFPB, it did not contain any information about race or
national origin (since federal law prohibits such disclosures in auto
lending). Instead, to evaluate any differences in dealer markup, the CFPB
used proxy data that looks to determine race by looking at surnames,
geographic location or a combination of both. While this proxy method has
been called into question by many industry stakeholders, the CFPB continues
to use this in its enforcement actions relating to indirect lending. In this
particular action, the hook that the CFPB hung its hat on was the
auto-dealer’s complete discretion for dealer markups, and Fifth Third’s
insufficient monitoring of the program.
The CFPB noted the following practices as key to overseeing indirect
auto lending relationships:
§ Imposing controls on
dealer markup, or otherwise revising dealer markup policies
§ Monitoring and
addressing the effects of markup policies as part of a robust fair lending
compliance program;
§ Eliminating dealer
discretion to markup buy rates, and fairly compensating dealers using a
different mechanism that does not result in discrimination, such as flat fees
per transaction
Also, following is a list of other useful sources:
§ NCUA Fair Lending Guide: NCUA’s
Office of Consumer Protection issued a Fair Lending Guide in
March of 2013. The guide gives a great overview of fair lending.
***
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